DBRS Confirms BB&T Corporation at AA (low), Changes Trend to Negative

DBRS has today confirmed the ratings of BB&T Corporation (BB&T or the Company) and its principal operating bank subsidiary, Branch Banking and Trust Company, including the Company’s Issuer & Senior Debt at AA (low). At the same time, DBRS has changed the trend on most ratings to Negative from Stable and confirmed the Stable trend for BB&T’s Short-Term Instrument rating.

The rating action follows BB&T’s announcement that it has agreed to acquire substantially all of the assets, deposits and certain liabilities of Colonial BancGroup, Inc. (Colonial) in a facilitated sales transaction from the Federal Deposit Insurance Corporation (FDIC).

The change in trend reflects DBRS’s concerns with the potential impact that the transaction may have on BB&T’s credit fundamentals, over the intermediate term. While BB&T is insulated by its loss sharing agreement with the FDIC and the marks that it is taking on Colonial’s assets, DBRS remains concerned with the intermediate term, economic conditions and credit implications of the Florida markets, where most of Colonial’s troubled commercial real estate exposure and branches are located. Nonetheless, and somewhat offsetting are BB&T’s conservative underwriting standards. Moreover, although BB&T has successfully integrated numerous bank and non-bank acquisitions, the Colonial acquisition represents its largest acquisition to date, and reflects a moderate degree of integration risk.

DBRS notes that if future credit costs related to BB&T’s Florida franchise are limited, the integration is successful, and overall asset quality deterioration moderates, ratings may be placed back on Stable trend.

BB&T’s ratings are underpinned by its relatively sound credit fundamentals. Although the Company’s loan portfolio is under stress and non-performing assets have risen, they remain manageable, as indicated by BB&T’s increased, yet fairly moderate level of net charge-offs (NCOs). Credit costs are more than supported by BB&T’s roughly $950 million of quarterly income before provisions and taxes (IBPT). Although BB&T’s regulatory capital compressed somewhat during Q2 2009, as a result of repaying $3.1 billion of TARP funds, the Company’s recent dividend reduction should help expedite capital growth. BB&T’s ratings are also underpinned by a demographically appealing footprint, which resides in eleven mid-Atlantic and Southeastern states, and sound liquidity position, buttressed by a solid core deposit base.

The principal challenges faced by BB&T are to sustain its IBPT, build capital and address the deterioration in its asset quality. Despite BB&T’s efforts to get ahead of its credit quality issues, DBRS remains concerned with its sustained level of deterioration. DBRS notes that BB&T’s ratings will be negatively pressured, if credit quality erosion and related costs steepen and capital is invaded.

BB&T continues to struggle with its asset quality deterioration, especially within its residential acquisition development and construction portfolio and more recently residential lot loan portfolio. On a geographic basis, the Company’s credit challenges remain concentrated in Georgia, Florida and the metro Washington D.C. area. At June 30, 2009, BB&T’s non-performing assets increased to a relatively high 3.29% of total loans, up from 2.72% at March 31, 2009. During Q2 2009, net charge-offs increased to 1.81% of average loans, from 1.58% for the prior quarter. Overall, management expects net loan losses to be in the 1.80% - 1.85% range for 2009. DBRS comments that BB&T’s allowance for loan loss reserves to non-performing assets was somewhat moderate at roughly 63% at June 30, 2009. Given the declining economy, DBRS anticipates higher future credit costs and expenses.

The Company’s solid, albeit stressed, earnings benefit from a diverse community-centered commercial and consumer banking business, a broad range of fee-based products and services that contribute over 40% to net revenues, and a solid, core deposit base, which represents 76% of net loans. BB&T’s margin remains sound and compares favorably with other super-regional banks. For Q2 2009, BB&T’s NIM was relatively stable at 3.56%.

Even after paying back TARP funds, BB&T’s Tier 1 and Total risk-based capital ratios were healthy, at an estimated 10.6% and 15.2%, respectively. DBRS anticipates that the Company will augment its capital position over the intermediate term, especially given the reduction in its common stock dividend by roughly 68% to $0.15 per share.

BB&T Corporation, a bank holding company with headquarters in Winston-Salem, North Carolina, reported $152.4 billion in assets at June 30, 2009.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.